Boeing lawyer warns of company's legal peril

Former Boeing CFO Michael Sears, left, walks with his attorney Jim Streicker from the U.S. District Court in Alexandria, Va., last February. Sears, 57, was sentenced to four months for aiding and abetting illegal employment negotiations.

At Boeing's annual leadership retreat earlier this month, the company's top lawyer delivered a devastating worst-case assessment of the potential damage that still looms from the company's recent ethics scandals.

General Counsel Doug Bain's unflinchingly direct speech offers an extraordinary look at the inner workings of a powerful company as it struggles to recover from scandal, retrieve its reputation and ensure ethical behavior in future.

"Was there a culture of win at any cost?' Bain asked his audience, some 260 top Boeing executives gathered in Orlando, Fla. "We now know what that cost is."

Bain tallied the severe sanctions he said are possible from two major scandals on Boeing's defense side and for alleged breaches of export laws. Boeing faces possible indictment by U.S. attorneys on both coasts, and the Department of Justice's assessment of damages exceeds $5 billion, he said. In addition, Boeing could be barred from government defense contracts or denied export licenses for both military and commercial sales, he said.

Bain also said 15 company vice presidents have been pushed out for various ethical lapses in recent years. "I found that to be an astronomically high number," he said.

The chilling litany seemed designed to get the attention of any Boeing executive remotely inclined to zone out during all the talk about ethics.

"There are some within the prosecutors' offices that believe that Boeing is rotten to the core," Bain said, according to a copy of the speech provided to The Seattle Times by a company insider. "They talk to us about pervasive misconduct and they describe it in geographic terms of spanning Cape Canaveral to Huntington Beach to Orlando to St. Louis to Chicago. They talk about it in terms of levels within the company that go from nonmanagement engineers to the chief financial officer."

Bain's remarks appear to contradict the widely held expectation that the government sometime this year will agree to a global settlement of the major scandals — with Boeing paying a fine in the hundreds of millions of dollars, and escaping further indictments. But people familiar with Boeing's position cautioned that a settlement on such terms is still expected.

Boeing spokesman John Dern said Bain was trying to shock his listeners into paying careful attention to ethics — not predicting legal outcomes.

Boeing's pending federal casesSears/Druyun

In 2002, Boeing Chief Financial Officer Mike Sears offered a job to Darleen Druyun, chief acquisitions officer at the Air Force, while she was overseeing work on Boeing contracts.

At her sentencing hearing in 2004, Druyun said she favored Boeing on multiple contracts because of favors granted by the company, including hiring her daughter and son-in-law.

The scandal sent Sears and Druyun to jail, forced the resignation of then-CEO Phil Condit and jeopardized major defense contracts, including the Air Force tanker program that would have secured up to 8,000 jobs in Everett.

Lockheed rocket documents

In 1997, McDonnell Douglas hired an engineer away from Lockheed Martin to work on the Delta IV rocket program. He brought with him proprietary documents, including financial details on Lockheed's planned bid for an Air Force space-rocket competition. Boeing merged with McDonnell Douglas later that year.

After the documents were discovered, three Boeing employees were indicted. The Pentagon stripped Boeing of seven rocket launches and suspended Boeing's rocket division from new government business for 20 months.

In May 2005, Boeing and Lockheed Martin announced a plan — still pending government approval — to merge their space-rocket businesses, including an agreement to drop litigation over the stolen rocket-contract information.

QRS-11 gyrochip

Between 2000 and 2003, Boeing exported commercial jets with a QRS-11 gyrochip in the instrument flight boxes, even though the chip was classified by the State Department as an export-restricted defense item because it can be used to stabilize and steer guided missiles.

The State Department last year prepared civil charges alleging 94 violations of the Arms Control Act. Boeing faces a potential fine of as much as $47 million.

"Bain's talk was intended to be provocative," said Dern. "There was a feeling it was vitally important for people to understand the worst-case potential for what could happen to the company."

Bain, who became general counsel in 1999 and is also a Boeing senior vice president, told the audience that his talk reflected "the perspective of the prosecutors and what they have told us," rather than Boeing's position on the legal issues.

He appeared to take the "scared straight" approach, personalizing the scandals for his executive audience. "These are not ZIP codes," Bain said, as he rattled off the federal prisoner numbers of Darleen Druyun, formerly a top Air Force procurement officer and then a Boeing executive, and Mike Sears, former Boeing chief financial officer.

Repeatedly he asked whether ultimate responsibility resided at the top — with his audience.

"Our jobs as the leaders of this enterprise is to establish a culture that ensures there is no next time," Bain said. "The bottom line is, we just cannot stand another major scandal."

"Dr. Death"

Among Bain's audience was Boeing Chief Executive Jim McNerney, who was aware in advance that the speech would be a downer.

Bain said McNerney had asked for "a candid assessment of our major scandals and how we got there." Bain proceeded to deliver.

He launched into summaries of Boeing's two major scandals and their repercussions.

"The U.S. attorney in Los Angeles is looking at indicting Boeing for violations of the Economic Espionage Act, the Procurement Integrity Act, the False Claims Act and the Major Frauds Act," he said.

"The U.S. attorney in Alexandria, Va., is looking at indicting us for violation of the Conflict of Interest Laws. And both are looking to throw in a few conspiracy and aiding-and-abetting charges, for good measure.

"When we first met with the Department of Justice to see if we could resolve this, it's their view that Boeing's actions have tainted the [Air Force space rocket] EELV contract, the NASA 19-pack contract [a 2002 contract for up to 19 Delta rocket launches], and 27 Darleen Druyun-related contracts. Their estimate of damage is $5 billion to $10 billion."

The Los Angeles attorney's office is investigating the Lockheed Martin documents scandal. In 1997, McDonnell Douglas, which merged with Boeing later that year, hired away an engineer from Lockheed for its Delta space-rocket program. The engineer brought with him thousands of pages of documents containing proprietary pricing information that allegedly helped Boeing underbid its rival and win the biggest share of an Air Force rocket contract.

The Virginia attorney's office is dealing with the Pentagon procurement scandal. In 2002, then-CFO Sears offered a job to Druyun while she was acquisitions officer at the Air Force. She later admitted favoring Boeing on contracts as payback for personal favors, including the hiring of her daughter and son-in-law.

"How come in the year 2000 nobody said, 'Should we really be hiring the relatives of our chief procurement officer of the largest customer we have on the defense side?' " Bain asked.

The first scandal led to Boeing being stripped of the launches it had won, worth about $1 billion, and suspension from further rocket contracts for 20 months. Three employees have been indicted on felonies.

The second sent both Sears and Druyun to jail, forced the resignation of then-CEO Phil Condit and jeopardized major defense contracts, including the Air Force tanker program that would have secured up to 8,000 jobs in Everett.

"If this never happened, we'd be selling tankers to the U.S. government and Italy would not be our only customer," Bain said.

Bain also displayed a list of five areas of State Department concern over Boeing's export of various sensitive technologies. These have cost the company $50 million in fines, he said, not counting an ongoing investigation of charges that Boeing Commercial Airplanes illegally exported a restricted gyroscope embedded inside 737 jets.

"The State Department's view of Boeing is, we just don't get it," Bain said.

Settlement talks

Boeing spokesman Dern said global-settlement talks on the two defense scandals are continuing. He added that the $5 billion to $10 billion figures mentioned by Bain "have never been proposed by the government as part of any discussions" of a settlement.

A lawyer experienced in defending companies in criminal cases agreed that a much lower settlement is likely.

"That's funny money," said Victoria Toensing, a partner in Washington, D.C.-based diGenova & Toensing. "The government tries to make it the worst of what it could have been. They use it as leverage."

Boeing already has lost well in excess of $1 billion in revenue through canceled and suspended contracts stemming from the two defense scandals. A person close to the negotiations, who requested anonymity, said the anticipated size of a settlement is on the order of $500 million.

The largest prior settlement of a procurement scandal by a defense contractor was in 1991 when Unisys agreed to pay $190 million.

Spokesmen for both U.S. attorneys offices declined comment.

Toensing also said the Department of Justice (DOJ) has become more cautious about indicting companies since the 2002 indictment of accounting firm Arthur Andersen put the company out of business.

Those also include "a presumed denial of export licenses ... both on the commercial and the government side," as well as loss of security clearances, a possible resuspension on bidding for space contracts or even total debarment from all government contracts on the defense side, he said.

"We have been trying to resolve these things," Bain said, referring to the ongoing settlement talks. "We have not been successful yet. It is my hope we will be."

Bain repeatedly urged his audience to look inward.

He said 900 of the formal ethics cases brought to the company's Office of Ethics and Business Conduct in 2005 were found to have substance.

He cited an employee survey in which 26 percent of those surveyed said they had observed abusive or intimidating behavior by management.

And of the 15 Boeing vice presidents terminated for ethics violations over the past few years, Bain said two had been ousted for committing crimes and the rest for offenses ranging from expense-account fraud to sexual harassment.

Boeing spokesman Dern said the large number of internal ethics complaints reflects well on Boeing's compliance system.

"We are working hard to promote a culture where people feel like they can raise issues formally and they trust the system," he said. The result is "an ethics system that is working every day and uncovering issues."

As for the employee survey suggesting a high level of management intimidation, "Those are troubling numbers," Dern said. "And numbers that we are working to lower."

At the end of his speech, Bain had one upbeat line.

"I really feel that we've turned the corner and that there's a renewed emphasis and energy on doing the right thing," he said.

Still, as Bain apparently intended, the questions he'd raised and left unanswered hung in the air.